It’s a brand new year! Which means we’re planning on bringing you fantastic content to start off the new decade right. Also new this year? We want you to be part of the story. Check out our content arc and themes below. If you have an idea for an article you’d like to contribute or would like to be on our podcast, please reach out.
Any of the themes below jump out at you? Interested in being a guest on our podcast or co-authoring an article? This is our official call for presentations! Reach out to Quantive’s Marketing Manager to find out more.
Without further ado, here are our overarching content themes for 2020:
January: New Beginnings
This is happening right now. It may be well after the new year, but this is the time where entrepreneurs are looking to set new goals for 2020. This can mean getting a business valuation, an ownership transition or building value. We want to play to these themes on why someone would need a formal business valuation and how that correlates with real life events where someone would be looking to engage with a valuation expert.
Why to get a formal business valuation:
- The business is probably your largest asset. Now isn’t the time to work on the back of a napkin.
- A qualified, certified Valuation Analyst can help get the RIGHT number for your business
- A formal valuation serves as a blueprint for demonstrating value in your company
- A certified valuation helps back up your asking price during negotiations
- Considering a sale or perhaps received an unsolicited offer
Additional valuation topics of interest:
- 409(a) valuations
- Buy-sell agreements
- Trust and estate valuation
- Divorce matters
- Financial reporting
- SBA loans
You can’t negotiate from a position of strength if you don’t know the value of your business. Our main initiative is to fire home this theme to our readers on why step one to value engineering is a business valuation.
February: Doom and Gloom / Winter Feelings
I don’t know about you, but for me February brings winter moodiness and restlessness. Statistically speaking, early February is also peak divorce season (seriously- this is a thing). With this in mind, we’ll be hitting some heavy topics related to Business Valuation for Divorce, including:
- Allocating assets in a divorce
- When to hire an appraiser
- Personal vs. Enterprise Goodwill
- “Double Dipping”
Our goal is to touch on all these common issues in divorce valuations and start answering some FAQs on everything that could potentially come up in a divorce litigation.
Of course, it’s not only marriages that fail – business partnerships do to. We’ll spend some time discussing Business Divorce as well – and a range of items around buy-sell agreements (and sometimes the lack thereof). Even the strongest business relationships among partners can be tested by retirement, transition or some other form of transaction.
A buy-sell agreement sets the parameters for any potential transaction which may take place. It is necessary in order to avoid potential litigation upon the departure of an owner, as is often the case the leaving owner believes that his shares are worth more than the remaining owners believe they are worth.
Other topics of interest include:
- Business Divorce prevention
- The importance of a shareholder agreement in any partnership
- The important functions of a buy-sell agreement
March: Turning the Corner
For most entrepreneurs their business is the largest asset that they own. Most entrepreneurs have built their company with an eye towards and eventual sale and retirement. Given these facts, a successful and enjoyable retirement is largely contingent upon the successful sale of the company.
Exit planning ultimately comes down to asking (and answering) one key question: “Can my company be sold for enough money to fund my retirement and lifestyle requirements?” In many cases the answer is no – but you are now well positioned to attack the problem and position yourself for a successful exit.
A robust exit plan considers all three elements:
- The Company – Value and “Saleability”
- The Estate – Value & Health of Portfolio
- The “Life After” plan – What will you do post-closing?
In addition, we’re looking to cover these topics in relation to exit planning:
- Mitigating risk
- Growing value
- Planning a succession
- Involvement of a Fractional CFO
- Involvement of a CEPA (Certified Exit Planning Advisor)
- Due diligence in pre-deal prep if looking to sell/transition ownership
April: Time to Wake Up / Focus on Growth
What should business owners do once they know their value? They involve a deal team. Selling a business of any size is a significant undertaking. Ideally their exit planning team should have these trusted advisors:
- Transaction Attorney
- CPA / Tax Advisor
- Valuation Expert
- Financial Planner / Wealth Manager
- “Improvement” Consultant
- Business Broker / M&A Intermediary
The goal for this theme is to go in-depth on building a rockstar exit planning team and spend some time on why these roles (individually and jointly) are so necessary to a seamless exit and how they play into value engineering.
May: Spring Cleaning
Statistics tell us that for most entrepreneurs and family business owners, their operating business makes up about 80% of their net worth. What’s more is that most business owners that we work with are what we think of as “business rich and cash poor.” They’ve built a very valuable – yet very illiquid – asset. The vast majority will rely on the liquidation of this asset in order to meet their retirement goals. That liquidation may be:
- A traditional M&A exit (i.e. a sale to a strategic or financial buyer)
- A sale to family members
- A sale to management
- A sale to employees
Regardless, if the proceeds from the transfer are needed to fund retirement, creating a financial plan focusing on the liquidation outcome is the cornerstone of sound transition planning in addition to a business valuation. Enter the two key data points business owners need to know:
- Financial Plan – How much do you need?
- Valuation – How much is the business worth today?
Financial planners and valuation experts can help business owners better understand the need for gap analysis in business valuation. However, it all starts with a completed certified business appraisal and working with a financial planner.
June: Catching Summer Vibes
Due diligence is the one opportunity for a buyer to get a clear and detailed picture of how the business works and the profits it can generate over the long-term. A seller, on the other hand, needs to realize that buyers are looking for potential problems that impact the business. Sellers need to invest the time and effort to address potential problems before the due diligence process starts.
An effective due diligence process will help a sale close sooner, and both sides can negotiate a sale price that is reasonable.
Due diligence items to highlight:
- Completing due diligence in a timely manner in order to close a sale
- Why preparing for due diligence in advance can make the overall due diligence process easier (I.e. financial statements, customer agreement, vendor contracts, employee agreements)
- Why all accounts need to be reconciled in a timely manner
- Why accrual method of accounting should be the only method being used in a business
- Why sellers need to invest the time and effort to address potential problems before the due diligence process starts
July: Dog Days of Summer
One of the challenges that we often face is correlating value to “sellability.” In many cases a business may have value to the owner, but there may be a very limited market for the company. (In fact, this notion is the basis of the concept of a Discount for Marketability.) For example, a small 3-person company with a single working owner may generate significant value for the owner. But that same business might not have significant conveyable value to a buyer.
What should a business owner do? They can first begin by doing things to make their business more sellable by:
- Understanding risk
- Getting clarity on what happens post-closing
- Getting smart about the deal structure
- Knowing the numbers of your business
- Building out a sales team
- Establishing high volume, reoccurring revenue
- Diversifying your client base
- Knowing your niche
We want business owners to understand that selling a business is hard work and isn’t as easy as just listing a business for sale.
Other items of interest:
- Discount for Lack of Marketability
- Discount for Lack of Control
August: Back to School
When forming a business, one of the first things every entrepreneur should think about is their ultimate exit. For most, this is the farthest thing from their mind. As any corporate attorney will tell you, in the same way in which you would plan to protect your children with the creation of a will, your business should also be treated with kid gloves. A Buy-Sell Agreement should be a top priority.
Buy-sell agreement benefits:
- Providing a market for the ownership interest of the closely held business upon a specified “triggering event.”
- Setting in place an exit strategy when the time comes and minimizing the potential for conflict.
- Defining how ownership interest(s) can be transferred if one or more of the owners can no longer or do not want to continue in the Business. Typically, the owner’s interest must be sold back to the company, the remaining shareholders, or any combination thereof.
- Protecting the interest of the surviving owner(s) and/or to not jeopardize the liquidity needs of the business to fund a buyout.
- Providing an agreed upon method for valuing an ownership interest (where we come in!).
- Providing a mechanism to fund the agreement, typically using an insurance policy.
- Allocating entity control among owners and management.
- Setting up a fair payout for heirs of a deceased partner.
- Establishing a valuation upon death of an owner which is integral in estate planning and taxation.
We would love to partner with any corporate attorneys for content on this theme as we believe discussing the benefits of a buy-sell agreement on a high level can help benefit business owners currently in the process of considering one.
September: Getting 4Q Ready / Finish Strong
A phrase we hear frequently is “a business is worth what someone is willing to pay for it.” And of course, this is a true statement. When a business sells… that’s the number.
But the problem with this statement is that it’s reactionary. Reactionary is bad.
Here’s what business owners should be considering:
- Playing Offense – working with a certified valuation expert gives you an advantage at the negotiations table
- Demonstrating Value – To get a more accurate value, valuation experts work through a process to dig in and understand why your business more or less is valuable than the market average
- Increasing Value – Regardless of method used to value a company, the number one concern for a buyer is their ability to generate profit. The most reliable indicator of this ability is your past performance. Valuation experts work with you to document those and build them back into the value of your business. This has a direct, significant impact on increasing both actual and perceived value.
All business owners should be looking to finish strong and get their businesses 4Q ready. Taking some of the given points above, the main idea is to help someone understand why they should pay more for a business. In order to do this, you need to play offense, demonstrate value and increase value.
Most business owners perform a business appraisal only once or twice during the ownership of their company, (I.e. exit planning, tax considerations and litigation). However, a company can be appraised for many of the following reasons:
- Buy/Sell agreements
- Economic damages
- Shareholder dissent
- Due diligence
- Litigation support
- Estate tax and tax planning
- SBA financing / SBA loans
- Gift tax
- 409(a) compensation / stock options
- Financial Reporting
Any of these valuation reasons speak to your wheelhouse? Drop us a line!
October: Pumpkin Spice and Everything Nice
Running a business isn’t always “pumpkin spice and everything nice”
A common objection we see from owners exploring an exit is ‘well if my company is only worth X annual earnings, I could just keep running it”
We want to strike down this stereotype and bring to light several issues that could be caused with this scenario:
- The reason small businesses trade at such low multiples is because of the huge amount of risk involved in them
- The reason you might want to sell is to transfer that risk from you to someone else in exchange for compensation
- Operating your company from Year 0 through infinity always retains the risk. Our model tells us that at some point in time you are likely to feel the sharp end of whatever form that risk takes
- You started this process to EXIT the company. Not exiting is the exact opposite of the reason you started this process
Business owners can run their company forever, but how ideal is that logic? Eventually they’re going to want to slow down and they’re going to want to have the proper assets in place in order to do so. We want to touch on all these scenarios above and drive home why “playing the waiting game” to exit plan within a business is for the birds.
Other topics of interest include:
- Gap analysis
- Risks that could be holding the company value down
- Actions to take to improve company value
- Impact of improved earnings on value
November: A Feast
Avoid those stretchy pants! This month we want to discuss all aspects of Fiscal Fitness business owners should have already done and/or should know the answer to:
- Formal business checklist
- An annual budget
- Review variances
- Understanding operating vs. non-operating income
- Earn a return on assets
- Plan for capital expenditures
- Chart of accounts
- Use accrual accounting
- Complete a formal monthly closing process
- Timely bank reconciliations
- Useful management reports
- Build a kick-butt financial advisor team
- Check for segregation of duties
- Organize your record keeping system
We want to get more granular on the items above in order to get business owners thinking about their fiscal fitness, why they’re so important and how they can play into setting new goals for 2021.
December: Set the Tone for 2021
Being a business owner requires wearing a lot of hats on the front and back end of the business. In our experience, this “DIY” theme tends to carry over into how business owners approach valuing their business as well.
We would strongly advise against this. Even if you have an impressive MBA from an accredited university, chances are that the core curriculum didn’t even come near covering valuation. What’s more – trying to DIY business valuation isn’t necessarily the best use of a business owners time.
Consider the methodologies behind business valuation:
- Asset Approach
- Market Approach
- Income Approach
While there is no definitive methodology for any one business, there are many approaches available for consideration in a valuation engagement. Determining which valuation method is appropriate for a given business or situation often requires the experience and expertise of a valuation analyst.
We’re looking to touch on all the points above and why DIY valuation should be a thing of the past.